Is Zero Inventory Management Possible?

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Inventory forecasting is one of the most complicated aspects of supply chain management. Excess stock can - and often does - tie up a significant amount of company funds at any given time. Henry Ford summed it up when he said ‘waste is that stock of materials and goods in excess of requirements that turns up in high prices and low wages.’ Supposedly, companies need to keep a certain amount of goods as a buffer in case of late delivery/natural disasters or risk threatening customer satisfaction, and it is this buffer than many focus on maintaining. However, while increasing inventory may be the simplest way to increase service level, it is also the most expensive and inflexible.

Zero inventory is a system in which a company keeps no or very little inventory in storage, only ordering exactly what is going to be sold and receiving it when needed. It is more effective, less expensive, and more flexible. It rests on the just-in-time (JIT) principle, which is based on short lead time as opposed to huge inventories, and was first successfully applied in Japan by Toyota to car manufacturing, before its popularity spread to the West in the 1980s. Ultimately, it rests on the idea that if supply chains are 100% reliable, and deliver exactly the raw materials and components required, when they are required, why would anyone bother holding inventory?

In today’s world, it is perfect for most businesses, and technology makes it far more achievable than ever before. Eric Carter, solutions architect at Indigo Software, notes that: ‘Zero inventory stock management is a key strategy for a warehouse to use because it significantly benefits cash flow and actually facilitates new business models. Just about every internet-based retailer has behind them a zero inventory model, whereby they ‘back to back’ the customer order with a PO and ship end product directly to the customer. Amazon’s Marketplace and many other discounted retailing models would be impossible without zero inventory stock management.’ It suits high variety, perishable, fashionable, and high obsolescence products - essentially all modern consumer products. BuzzFeed, for example, uses customizable products to eliminate holding inventory. Take, for example, its recent decision to exploit President Trump’s criticism of it as a ‘failing pile of garbage’ by selling t-shirts with the slogan on it and branded bins. Buzzfeed is famous for its viral articles and its ability to take advantage of trends, and its supply chain operations for its branded merchandise is no different.

In order for zero inventory to work, goods have to be produced and moved based on actual demand or consumption. To ensure processes are optimised, companies need an interface with an holistic view of all their suppliers throughout the chain, and they need to carefully track data insights so that when items sell out, everything is updated instantly - all the systems so that products relying on raw materials can be put on hold, and the website so that customers aren’t left disappointed. One technology helping provide even more data, thereby enabling an even higher degree of precision, is the Internet of Things (IoT). The IoT will see hundreds of millions of internet-connected sensors added throughout the chain in the coming years, which will allow supply chain managers to track raw material and component inventories wherever they are, enabling real-time visibility into inventory levels and demand.

Zero inventory supply chain management puts pressure right through the supply chain. Companies have to make smaller, more frequent production runs, perfect their operations, and work more effectively. To facilitate the requirements of zero inventory, the burden of carrying raw materials with inventory also has to push back down the supply chain onto suppliers, who have to fulfill orders individually and ship straight to the customer, which can lead to a battle between the manufacturer and the retailer to agree quantities and the manufacturer may need to become directly involved with B2C orders, which is something they never necessarily wanted to do. Communication and maintaining a strong relationship is vital, as without a high level of collaboration the zero goal is never going to be reached. Having the necessary technology and skillsets is also vital. Excel is not enough, and high levels of investment with the right data software and interface will be needed. Even with all of this effort and money expended, it is likely that you will never truly achieve zero inventory. However, the closer you can get, the greater the savings, and the benefits to cash flow from rent, obsolete products, staff costs, and so forth that come from sustaining a huge, unnecessary inventory are tremendous.